Summary:
Markets expect no rate change at July's FOMC, but Powell's tone may hint at easing ahead, impacting equities, gold, and the dollar.
As the financial world turns its attention to Washington, the upcoming FOMC meeting—scheduled for 30 July (31 July Beijing time)—has become a focal point for traders, economists, and policy watchers alike. The consensus? The Federal Reserve is expected to keep interest rates unchanged for the fifth consecutive time, yet all eyes will be on Chairman Jerome Powell's tone for any signs of a dovish shift.
Despite persistent calls for rate cuts from political quarters—including former President Donald Trump—the market remains firmly convinced that the Fed will maintain the federal funds rate between 4.25% and 4.50%. According to the CME FedWatch Tool, the probability of a rate cut in July is a mere 3.1%, while expectations for a September rate cut have risen to 61.7%. This growing optimism for easing later in the year suggests investors are placing more weight on future data and Powell's guidance than the immediate decision.
Several macroeconomic factors support a wait-and-see approach. Notably, Barclays Bank has pointed to ongoing trade policy uncertainties—specifically tariffs—as a critical reason behind the Fed's cautious stance. On one hand, tariffs contribute to rising inflationary pressure, but on the other, they simultaneously risk undermining economic growth. This dual impact complicates the Fed's ability to draw firm conclusions about the appropriate policy path.
In such an environment, holding rates steady allows the central bank more time to monitor inflation dynamics and economic resilience. By delaying action, the Fed retains flexibility while avoiding unnecessary disruptions to financial markets.
While the interest rate decision may be a foregone conclusion, it is Chairman Powell's post-meeting statement and press conference that could move markets. Analysts at Bank of America believe Powell will reaffirm the Fed's commitment to independence and signal a data-dependent stance. However, he may also cautiously open the door to rate cuts, especially if inflation continues to evolve in line with projections.
Such a nuanced, dovish message would act as a "calming signal" for the markets, indicating that while the Fed is not ready to act in July, it remains attentive and responsive to incoming data. A measured shift in tone could bolster risk assets, especially equities and gold, while applying modest downward pressure on the US dollar.
Depending on the exact content and tone of Powell's remarks, several market outcomes are possible:
1.Dovish Statement, No Rate Cut
Market Reaction: Boosts September rate cut expectations.
Impact: US dollar weakens; equities and gold benefit.
If Powell leans dovish without delivering immediate policy action, markets may interpret this as a signal that easing is imminent, driving investors towards riskier assets and safe havens like gold.
2. Surprise Rate Cut
Market Reaction: Stocks surge; US dollar plunges.
Impact: Could spark a broad rally across global equity markets and commodities.
Though unlikely based on current probabilities, a surprise rate cut would represent a major pivot. Such a move would be seen as a proactive step to shield the economy from potential headwinds, triggering widespread risk-on sentiment.
3. Hawkish Tone, No Rate Cut
Market Reaction: September cut expectations drop.
Impact: US dollar strengthens; stocks and gold falter.
Should Powell strike a more hawkish or data-sceptical tone, markets would recalibrate their expectations. A reduced likelihood of near-term easing would support the dollar and potentially pressure asset classes that have been buoyed by dovish hopes.
Beyond the July meeting, the September FOMC gathering now looms larger than ever. If inflation moderates and labour markets soften even slightly, the path may be cleared for policy easing. On the other hand, a resilient economy and stubborn price pressures could keep the Fed in a holding pattern well into the year's final quarter.
As always, the Fed's challenge lies in maintaining credibility while balancing competing mandates—price stability and maximum employment—amid a volatile global backdrop. For investors, central bank communication remains as pivotal as actual policy moves.
This FOMC Meeting Preview highlights a key moment in the Fed's 2025 monetary policy journey. With rates widely expected to remain unchanged in July, the spotlight shifts to Powell's forward guidance. Will he reinforce the Fed's cautious stance, or will he hint at an impending shift?
Either way, the implications are far-reaching. For the US dollar, equities, and gold, the tone from the Fed Chair could be the true market mover. Investors would be wise to listen carefully—not just to what is said, but how it's said.
Disclaimer: This material is for general information purposes only and is not intended as (and should not be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by EBC or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.
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